IRA vs CD — what's the difference and which one should you pick? (2024)

Choosing between a certificate of deposit (CD) and an individual retirement account (IRA) boils down to your plans for the money. CDs offer stability for short-term goals with fixed APYs while IRAs allow you to invest in the stock market for long-term retirement savings. Learn how to use both account types to meet your financial goals.

What we'll cover

  • What is a CD
  • Pros and cons of CDs
  • What is an IRA
  • Pros and cons of IRAs
  • Which is better: CDs or IRA?

Compare CDs

What is a CD?

A certificate of deposit is an interest-bearing account offered by banks and credit unions where you place your money. Unlike savings accounts, most CDs require you to lock away your funds for a certain period (called the CD's term). Because of that, the APY of your CD typically won't change during the CD's term, no matter what happens with interest rates in the wider market. When interest rates are high (and you expect they may fall soon), it can be a good idea to put some money in a CD to lock in those high rates.

Alliant Credit Union, our top pick for CD rates, offers CDs with up to 5.20% APY with terms ranging from three months to 60 months with a minimum $1,000 deposit required.

Alliant Credit Union CDs

Alliant Credit Union is a Member NCUA.

  • Annual Percentage Yield (APY)

    From 4.00% to 5.20% APY

  • Terms

    From 3 months to 60 months

  • Minimum balance

    $1,000 minimum deposit

  • Monthly fee

    None

  • Early withdrawal penalty fee

    Early withdrawal penalty may apply. For CD term of 17 months or less, penalty is number of days the certificate is open, up to 90 days; for CD term of 18 to 23 months, penalty is number of days the certificate is open, up to 120 days; for CD term of 24 to 48 or 60 months, penalty is number of days the certificate is open, up to 180 days; for during 7-day grace period for new certificates, penalty is 7 days (no dividends are earned), a penalty will be applied from the principal balance.

Terms apply.

Aside from traditional CDs, there are alternative options such as the bump-up CD, which lets you request a higher APY if rates increase mid-term, or the no-penalty CD, which allows you to withdraw your money before the term ends without paying a fee. Ally Bank offers several of these types of CDs at competitive rates and with terms ranging from three months to five years. The five-yearAlly Bank High Yield CD, for example, offers a 3.90% APY for no minimum deposit required.

Ally Bank® CDs

  • Annual Percentage Yield (APY)

    From 3.00% to 4.50% APY

  • Terms

    From 3 months to 5 years

  • Minimum balance

    None

  • Monthly fee

    None

  • Early withdrawal penalty fee

    High Yield CDs and Raise Your Rate CDs have early withdrawal penalties that vary based on your CD term. With the No Penalty CD, withdraw all your money any time after the first 6 days following the date you funded the account and keep the interest earned with no penalty.

Terms apply.

Alliant also offers jumbo CDs where you can earn higher rates with deposits of $75,000 or more.

Pros and cons of CDs

While CDs help set aside your funds for a certain period, they do come with some caveats that are important to consider.

Pros

  • Guaranteed rate of return - With CDs, you agree to deposit your funds for a set duration at a fixed interest rate, ensuring a consistent return on your investment.
  • Higher yield than savings accounts- CDs typically offer a higher yield than savings accounts, including some high-yield savings accounts, since you have far less flexibility of when to withdraw your money.

Cons

  • No liquidity- You won't be able to access your CD's money before the end of the term without penalty.
  • Early withdrawal penalty- Penalty fees associated with CDs can vary depending on your bank and your CD's term length, but they're usually based on the interest earned or the interest you would have earned over a certain number of days or months.

Compare investment resources

What is an IRA?

An IRA is a tax-advantaged investment account that individuals with taxable income can set up through a financial institution.IRAs are like 401(k) plans in that you can invest money into different assets such as stocks, bonds or mutual funds but unlike most 401(k)s, IRAs can be opened by an individual instead of an employer.

Traditional IRAs allow for pre-tax contributions, meaning you generally won't pay any taxes on your contributions until withdrawal in retirement. Roth IRAs involve contributing after-tax dollars, allowing you to make tax-free withdrawals later in life.

IRAs also come with annual contribution limits and you must typically wait until age 59 ½ to start making withdrawals without penalty, according to the IRS.In addition, you must meet certain income qualifications to contribute to a Roth IRA — if you earn too much money, you might not be able to fund one.

If you want to open an IRA, go through a reputable broker you can trust. Fidelity Investments and Vanguard both offer commission-free tradingon various securities, such as stock and ETF trades, and zeroor low-expense ratioindex funds, making it relatively affordable to invest. Both also offer robo-advisor options for beginner investors new to the stock market.

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go®account, but minimum $10 balance according to the investment strategy chosen

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other:Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

Vanguard

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguardaccount, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enroll

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you opt into paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% in advisory fees (after 90 days)

  • Bonus

    None

  • Investment vehicles

    Robo-advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading Other:Vanguard 529 Plan

  • Investment options

    Stocks, bonds, mutual funds, CDs, ETFs and options

  • Educational resources

    Retirement planning tools

Terms apply.

Pros and cons of IRAs

IRAs are designed to help you grow your retirement savings. You shouldn't make any early withdrawals unless absolutely necessary, since they usually come with hefty financial penalties.

Pros

  • Tax-advantaged - With traditional IRAs your contributions are tax-deferred until after withdrawals, while Roth IRAs allow you to contribute after-tax dollars and pay no tax on the withdrawals.
  • Flexible investment options - Depending on your financial institution, your IRAs could offer a variety of investment options, including commission-free stocks or exchange-traded funds.

Cons

  • Low annual contribution limit - IRAs come with annual contribution limits that the IRS adjusts every year.
  • Early withdrawal penalties - Different early withdrawal penalties apply according to the type of IRA. For example, traditional IRAs usually levy a 10% penalty for early withdrawals before age 59½.

Compare investing products

Which is better: A CD or an IRA?

If you're saving for retirement, you'll almost always want to choose an IRA over a CD for your funds. Not only does an IRA give you significant tax advantages, but it's also an investment account that can potentially earn a much higher rate of return than a CD.

However, even the safest investments come with a potential for loss. An FDIC-insured CD virtually guarantees you won't lose your money and works best for short-to-medium-term goals such as saving for a down payment for a home.

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IRA vs CD — what's the difference and which one should you pick? (2024)

FAQs

IRA vs CD — what's the difference and which one should you pick? ›

CDs offer stability for short-term goals with fixed APYs while IRAs allow you to invest in the stock market for long-term retirement savings. Learn how to use both account types to meet your financial goals.

Can you transfer an IRA to a CD without paying taxes? ›

Also, note that rollovers need to be like-kind to avoid any tax consequences. If you have a traditional 401(k) and you want to roll it into a Roth IRA CD, for instance, the IRS requires you to pay taxes on the amount that you're converting.

Are IRA certificates worth it? ›

IRA CDs are great for conservative, low-risk investors who want security against their initial capital and a guaranteed yield. If you will retire soon or are already retired, you may want to shift some of the nest egg into an IRA CD.

Why do people prefer IRA? ›

It can pay to save in an IRA when you're trying to accumulate enough money for retirement. There are tax benefits, and your money has a chance to grow. Every little bit helps. If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense.

Is an IRA the best way to save money? ›

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73. With traditional IRAs, you're investing more upfront than you would with a typical brokerage account.

Which is better IRA or CD? ›

Which is better: A CD or an IRA? If you're saving for retirement, you'll almost always want to choose an IRA over a CD for your funds. Not only does an IRA give you significant tax advantages, but it's also an investment account that can potentially earn a much higher rate of return than a CD.

What is the $1000 a month rule for retirement? ›

The $1,000 per month rule is a guideline to estimate retirement savings based on your desired monthly income. For every $240,000 you set aside, you can receive $1,000 a month if you withdraw 5% each year. This simple rule is a good starting point, but you should consider factors like inflation for long-term planning.

Is there a downside to an IRA? ›

There's a lot to like about Roth IRAs, including tax-free withdrawals in retirement. But the accounts do have some cons, such as no upfront tax break, and income limits for contributing.

What is the safest IRA to have? ›

Charles Schwab is one of the best overall IRA providers, with high-quality customer service, no account minimum and low fees. The company offers a large selection of no-transaction-fee funds, gives users access to extensive research and charges no commission for stock, options and ETF trades.

What happens to an IRA CD when it matures? ›

CD accounts are set to auto-renew at maturity, but there is a grace period (a period of time following the maturity date of the account) during which you can make a deposit to or withdrawal from the account, change the term of the account or cancel the account.

Is there anything better than an IRA? ›

401(k)s offer higher contribution limits.

The employer-sponsored plan allows you to add much more to your retirement savings than an IRA – $23,000 compared to $7,000 in 2024. Plus, if you're over age 50 you get a larger catch-up contribution maximum with the 401(k) – $7,500 compared to $1,000 in the IRA.

How much will an IRA reduce my taxes? ›

Reduce Your 2023 Tax Bill

For example, a worker who pays a 24% tax rate and contributes $6,500 to an IRA will pay $1,560 less in federal income tax. Taxes won't be due on that money until it is withdrawn from the account. The last day to contribute to an IRA for 2023 is the tax filing deadline in April 2024.

How much does an IRA earn per year? ›

Historically, the annual stock market return is 10%, or about 6 or 7% after inflation. Depending on your investment choices, you may be able to earn that 6% to 7%, or potentially more. You may also earn less, or lose money.

Where is the safest place to put your retirement money? ›

Below, you'll find the safest options that also provide a reasonable return on investment.
  1. Treasury bills, notes, and bonds. The federal government raises money by issuing Treasury marketable securities. ...
  2. Bond ETFs. There are many organizations that issue bonds to raise money. ...
  3. CDs. ...
  4. High-yield savings accounts.
May 3, 2024

How can I stop my IRA from losing money? ›

Make sure your investments are well diversified

The first thing you should do if your 401(k) or individual retirement plan (IRA) is losing money is to check that you are well diversified. You want your money distributed among many stocks, bonds, and other investment products.

Is it smart to put money in an IRA right now? ›

When should I contribute to an IRA? If you do not have access to a retirement plan through your employer, an IRA is a great option. And a good guideline for when to contribute is “the earlier the better.” With investing, time is your greatest asset. That means the sooner you start saving, the longer it can grow.

Do you pay taxes on a CD in an IRA? ›

Tax is due on short-term CDs, those with 1 Year or shorter terms, at maturity. Interest on longer-term CDs is taxed as it accrues during the CD term. IRAs that invest in CDs do not have to pay tax currently on the IRA CDs' income or gains.

Can IRA money go into a CD? ›

An IRA CD is a safe, FDIC-insured investment that combines the tax benefits of a traditional or Roth IRA with the predictable interest income of a certificate of deposit (CD). However, IRA CDs aren't the best choice for everyone and may be too conservative for many.

Can I move my 401k to CD without paying taxes? ›

You can rollover your 401(k) account into a CD without any penalties or taxes. But you need to make sure you're rolling over into an IRA CD, specifically. And always ensure to roll over into a like-kind account, whether a traditional or Roth retirement account, or you might get hit with a surprise tax bill.

What is the penalty for IRA CD transfer? ›

If you withdraw money from a traditional IRA CD before the end of the term and you're under age 59½, it's necessary to pay income taxes and a 10 percent penalty (unless you're exempt under an IRS rule).

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